More FERC Investigation Risks


New transparency practice turns confidentiality on its head.

Fortnightly Magazine - March 2011

The Federal Energy Regulatory Commission (FERC) now authorizes the director of its Office of Enforcement (OE) to cause the names of subjects under investigation, and summaries of their alleged wrongful conduct, to be noticed to the public earlier than had been the practice.1 Moreover, such public disclosure occurs before either FERC’s own, independent review of staff’s prosecutorial recommendations, or any findings of wrongdoing by FERC itself.2 Where FERC’s traditional approach has treated staff preliminary findings as confidential, presumably in part serving interests in due process and a presumption of innocence, its new, make-public-earlier approach increases risks of reputational and other harms for subjects of investigations. Targeted subjects now must interact with staff very carefully for purposes of initial staff reviews of information, preliminary examinations of identified activities, investigations, fact discovery and gathering through data and document requests, interrogatories, interviews, depositions, and preliminary findings letters.

Without evident concern for other entities’ potential uses of staff’s information at FERC or elsewhere, FERC paints its accelerated public notice as merely a procedural exception to the traditional, confidential status of staff’s beliefs. In justification, FERC foresees as a positive development that other market participants will step forward to inform OE staff about previously unknown factors concerning the asserted violations staff has preliminarily noticed. FERC also anticipates staff use of the factors against the targeted subjects in later settlement negotiations or litigations. FERC plans to monitor its accelerated public notice procedure for possible reconsideration after an OE staff report on the mechanism’s employment in 2010-’11.

Traditional Confidentiality

In the Energy Policy Act of 2005 (EPACT 2005) Congress authorized FERC to impose substantial monetary and other penalties for violations of rules, regulations, statutes, and orders that FERC administers.3 The agency can penalize for any FERC-jurisdictional matter after non-adjudicative investigations, which under General Rule Part 1b may be preliminary or formal, private or public. Preliminary investigations are non-formal investigations conducted by FERC or its staff.4 By longstanding general principle, all information and documents obtained during investigation, whether or not subpoenaed, and all investigative proceedings, are treated as non-public by FERC and its staff.5

After EPAct 2005, staff has undertaken many confidential, non-public preliminary examinations of possible violations. Staff also may decide to open a confidential Part 1b investigation. As facts emerge, staff either may form an opinion that a violation occurred or, in many situations, may end investigations without further action. If violations are suspected, staff can provide a preliminary findings letter, containing supporting facts and reasons, to the subject under investigation and the subject may respond.

After that preliminary findings letter and response stage, OE staff’s findings and opinions traditionally had remained confidential for possibly considerable intervals. That confidentiality often had ended with either the benediction of an order of settlement between FERC and the subject, or FERC’s challenge in an order to the subject to show cause why a violation hadn’t occurred. Before either of those kinds of orders that ended confidentiality, FERC had reviewed staff’s earlier prosecutorial findings and opinions and independently decided to proceed. That confidentiality, with accompanying protection for the subject, no longer exists. Public disclosure of staff’s beliefs about a subject’s alleged wrongful conduct, accelerated to the stage of staff’s preliminary findings letter and subject’s response, now increases risks for the subject perhaps well before FERC’s own, independent review of staff recommendations and any FERC finding of wrongdoing.

Preliminary Notice

In a non-public, Part 1b investigation, after concluding that a violation of a FERC requirement has occurred in its view, OE staff can ask FERC for authority to discuss settlement and attempt to obtain remedies, sanctions, or penalties for the alleged violation. The OE director then also can direct the FERC secretary to issue a Staff’s Preliminary Notice of Violations (Notice) to the public in the matter. Sufficient to inform the public of the basic facts surrounding the investigation, the Notice identifies the subject under investigation, the time and place of the alleged conduct, and the rules, regulations, statutes, or orders allegedly violated, concisely describing the alleged wrongful conduct. While FERC anticipates that a Notice will issue in every such investigation, the agency retains discretion to review, stay, bar, or countermand any Notice. It bears emphasis that the Notice consists only of staff’s, not FERC’s, belief that a subject might have violated the NGA, NGPA, FPA, or other FERC-jurisdictional requirements.

A Notice can issue after staff, continuing to act in confidence, has completed fact analysis and informed the subject of preliminary findings and conclusions, including that one or more violations might have occurred. The subject has the chance to respond in writing to staff’s preliminary findings letter. Staff will review the response. The OE director notifies FERC, and OE staff notifies the subject, in advance of a Notice to be issued. The Notice provides enough information to enable third parties to inform staff of any additional, relevant information. No right is conferred on third parties to intervene in the investigation. No other right is given for the investigation, except rights coincidental to using the Notice mechanism as a vehicle for any third party communications to staff. Should staff terminate an investigation after the Notice has issued, FERC authorizes public notice of the termination.

Transparency Justifications

FERC considers insufficiently transparent the traditional lack of public notification of its staff’s preliminary investigation findings, analyses, opinions, and beliefs until either a settlement order or an order to show cause. FERC wants the public to learn staff’s views earlier. FERC would disavow the Queen of Hearts’ “[s]entence first—verdict afterwards” instinct (Lewis Carroll, Alice’s Adventures in Wonderland, ch. 12) by stating that a Notice has no substantive legal effect, and doesn’t conclusively or otherwise affect a subject’s rights.6 FERC also insists a Notice is entirely separate from and unrelated to any findings it may later make. That very separateness, however, increases risks of reputational and other harms to investigated subjects when Notices are based only on staff’s, not FERC’s, say so.

Turning traditional confidentiality on its head, FERC justifies accelerated public disclosure of the subject’s identity in part because it will enable market participants to bring additional information to OE staff’s attention for possible further investigation. FERC assures that it and its staff will treat any such additional third-party communications confidentially. Perhaps, FERC will treat confidentially even the names of third-party communicators. Industry participants apparently must simply hope that any wheat will be sifted from chaff.

FERC foresees a possible benefit to those who may have been injured by the subject’s conduct and can bring their concerns to staff prior to any resolution in a binding settlement. Also, FERC says the subject possibly could be exculpated by other entities’ information, leading to mitigation of penalties or even to the closure of an investigation. But FERC is silent on the potential for other market participants to abuse or confuse an ongoing investigation of a competitor. That is, market participants or other entities could file complaints at FERC, or seek other relief under federal or state law, piggybacking in whole or in part on accelerated Notice information.7 Apparently not concerned about opening a can of worms, FERC remarks approvingly that the Notice invites information on any heretofore unknown factors, as to which staff will seek the subject’s views, but which staff can use in future settlement negotiation or litigation with the subject.8 If unknown factors are forthcoming, all market participants, and plainly the subject of the investigation, should try to monitor for staff’s appropriately cautious use of the factors to inform prosecutorial discretion and fortify its application.

Other justifications for accelerated public disclosure seem smaller beer. FERC says accelerated disclosure of a subject’s identity relieves entities not under investigation from receiving unwarranted suspicion. But, before FERC conducts its own review of staff recommendations or independently finds any grounds of wrongdoing, the subjects of investigations themselves appear more likely to suffer from unwarranted suspicion. FERC also comments that accelerated disclosure will help educate, alert, or warn the public about violations that FERC itself is investigating. But, a Notice makes public only staff’s views, not FERC’s. Finally, it’s hard to credit FERC’s lion-lies-down-with-the-lamb view that Notices will induce others to evaluate their activities, cease illegal conduct, and file self-reports at FERC.

Reputational Harm Outweighed

When public notice of an investigation or a subject’s identity was restrained until a settlement or show-cause order, the concern was to prevent premature disclosure’s unnecessarily adverse effects on a subject’s reputation, including lowering its stock price or otherwise diminishing its ability to attract capital. FERC still acknowledges the unacceptable risk of reputational harm from disclosure at the outset of a staff investigation. Consistent with due process and a presumption of innocence, a subject plainly must not be exposed to public suspicion before enough staff discovery is conducted to reach even a preliminary staff finding of a possible violation. By authorizing Notices during ongoing staff investigations, FERC disregards the uncertain timing of investigatory procedures, and the absence of both its own review of staff recommendations and its independent findings of wrongdoing. It believes, by the preliminary findings stage, that staff’s investigation and its details soon will be made public by means of settlement, show-cause order, or a Securities and Exchange Commission filing of a subject’s potential financial liability. FERC decides on balance that the public notice of staff’s preliminary opinions may acceptably be accelerated.

Monitoring for Abuses

Industry participants who might wish FERC would amend its Notice policy face discouraging prospects. It would take time to challenge FERC’s position that its procedural orders here are unreviewable in the courts. Alternately, FERC could decide to modify its orders after its OE staff report on 2010-’11 experience with these Notices, but such a decision would require changes of mind among the FERC majority that authorized the Notice procedure.

Realistically, gas and electric industry participants should reconcile themselves to the Notice mechanism, which increases risks of harm from accelerated public disclosure of preliminary staff analysis before FERC either conducts its own review of staff recommendations or makes any findings of wrongdoing itself. Moreover, the Notice’s glaring public eye encourages others, including competitors, to contribute not-previously-known factors to ongoing investigations, or possibly to employ Notice information for purposes apart from staff’s preliminary investigation. Subjects must be wary of such consequences and give great care to staff’s initial reviews of information, preliminary examinations of identified activities, investigations, fact discovery and gathering through data and document requests, interrogatories, interviews, depositions, and preliminary findings letters.

FERC indicates that its new Notice procedure promotes additional investigative transparency and good government. Likewise, all industry participants should be alert that FERC and its OE staff operate the Notice mechanism to avoid inaccurate, conclusory, unfair, or otherwise inappropriate agency decision making, and to monitor for third party abuses. Best regulatory practice sustains due process of law and a presumption of innocence.



1. Enforcement of Statutes, Regulations, and Orders, Order Authorizing Secretary To Issue Staff’s Preliminary Notice of Violations, 129 FERC ¶ 61,247, at text para. (P) 6 (2009) (“One cost of accelerated public disclosure is that the entity…is placed in the public eye, with possible adverse consequences to its reputation.”); Order On Requests For Rehearing And Clarification, 134 FERC ¶ 61,054 (2011). “OE staff” also are referred to here as “staff.”

2. FERC predicts “settlement negotiations will soon follow upon the heels of the Notice, and a subject’s identity would… be disclosed at the time…[FERC] approves a settlement…or issues an order to show cause.” 134 FERC ¶ 61,054, at P 18. But, timing for those events is uncertain and the glare of the public eye is not.

3. Natural Gas Act (NGA), 15 U.S.C. § 717t-1(a); Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. § 3414(b)(6)(A); Federal Power Act (FPA), 16 U.S.C. § 825o-1(b); J. Michel Marcoux, “Day Of Decision For FERC,” 143 Pub. Utils. Fort., No. 12, 55, 58 (Dec. 2005) (“Stiff New Penalties” chart). EPAct 2005 also increased criminal penalties (fines, prison terms) for NGA, NGPA, and FPA violations.

4. FERC or its staff may, in its discretion, initiate a preliminary investigation where no process is issued or testimony is compelled. If a formal investigation appears appropriate, staff will so recommend to FERC. 18 C.F.R. § 1b.6, Preliminary investigations.

5. Subject to exceptions when FERC directs or authorizes public disclosure, as done in FERC’s order here, or when information or documents are placed in the public record of an adjudicative proceeding, or when the Freedom of Information Act requires disclosure. 18 C.F.R. § 1b.9, Confidentiality of investigations.

6. In a Jan. 28, 2011, statement, a commissioner dissenting from the order on rehearing and clarification instead would have modified the Notice mechanism to mask the subject’s identity, protecting its reputation until FERC conducts its own independent review (pages 1-2, 7-8). FERC also declares its two orders to be discretionary, unreviewable agency policy statements, and pronouncements of agency organization, procedure, or practice. 134 FERC ¶ 61,054, at PP 11-13. The dissenting commissioner instead would have sought public comment under the Administrative Procedure Act (pages 2-6).

7. Any person may file a complaint seeking FERC action against any other person alleged to be in contravention or violation of any statute, rule, order, or other law administered by FERC, or for any other alleged wrong over which FERC may have jurisdiction. 18 C.F.R. § 385.206(a), Complaints, General rule.

8. 134 FERC ¶ 61,054, at P 15.